Agency contractors, don’t let your limited company become an afterthought

As a significant chunk of contractors become familiar with umbrella companies and how they take care of many matters you once had to do yourself, we’d urge such contractors who use a brolly -- but still retain their limited company -- not to neglect their duties as a director, writes Matt Collingwood, director of IT recruitment agency VIQU.                                                  

We’re aware that this is the sort of warning which insolvency or legal experts tend to issue! But we’re seeing quite a bit in the recruitment market space which gives us cause for concern, as a facilitator of work for PSCs.

Are you exercising reasonable care, skill and diligence?

From the outset when you’re directing your own Personal Service Company, it’s worth factoring in, to everything you do, that the Companies Act 2006 states:

“A director of a company must exercise reasonable care, skill and diligence”.

Despite this, we’ve seen some contractors recently spend ALL their company turnover in one fell swoop, and then be forced to take out a loan to pay their first year’s corporation tax and other liabilities!

In life, tax is one of two things that is guaranteed. So don’t forget to plan for these payments to HMRC. 

Similarly tax-related, while our recruitment business pays into a contractor’s nominated PSC bank account, some contractors we know recently chose to file no accounts and dissolve their PSC instead!

What us recruiters have to tell HMRC – every quarter

However, please be aware because many contractors aren’t -- under the Finance Act 2014, all recruitment agencies have to provide an Excel spreadsheet every quarter to HMRC, listing the names of each and every PSC we have paid. And the values paid to those PSCs.

Further be aware, HMRC use the data provided (by agencies and Companies House) to compare values. We know of  two contractors who have received unwelcome letters from HMRC, asking the contractors – as directors -- to explain ‘anomalies’ in the last 18 months.  

Don’t be like Mark

Last but not least, expenses. I remember speaking with contractor ‘Mark.’ He quite openly told me that all purchases for his dog – yes, his DOG, and with purchases ranging from grooming and toys to doggy treats and vet bills, were put through his PSC.

He went on to explain that the dog (a French Bulldog, who is actually his spouse’s) was an effective guard dog, prowling and patrolling to protect the IT equipment in his company’s office. Which was a spare bedroom!

Now, I’m no accountant, but I know HMRC would take issue with what Mark genuinely thought were allowable business expenses.

But it’s not just Mark. A friend is the headmaster of a local independent school and one of the most common questions he gets asked by parents is “Can you just directly invoice my limited company for the school fees?”

Finally, you don’t need to be Richard Branson but…

Transitioning from a permanent job to running your own PSC requires business acumen and a mental mind shift.

Certainly, there are a ton of benefits in becoming self-employed. Yet with the majority of contractors we place still being directors of their own PSC, it is important to remember the responsibilities you are taking on.

It’s equally important to know, and make use of the expenses to which HMRC says directors are legally entitled. And you don’t need to be serial entrepreneur and business whiz Richard Branson to run your own PSC, but I would strongly advise all contractors to find a good accountant who can help on expenses, dividend planning, financial management and company compliance. You must know your responsibilities as a director as set out in the Companies Act, and actively abide by them. And to the few contractors who don’t follow the rules, I’d urgently recommend fixing your ways – I’ve seen the distress and consequences to contractors when HMRC investigates and it’s not pretty.

Profile picture for user Matt Collingwood

Written by Matt Collingwood

Matt Collingwood is the Managing Director of VIQU Ltd. an IT recruitment and project-based consultancy company with offices in Birmingham and Southampton. Matt is also the co-founder of the Recruitment Canaries, a network of West Midlands based recruitment agencies who encourage collaboration, best practice and upholding the standards and ethics of the recruitment industry.

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